Over the past few decades, an increasing amount of public money has been outsourced. Medical, security, and social services have been put out to tender, and contracts worth over £100 billion a year in the UK are won by businesses ranging from major accountancy firms to tiny consultancies. Sometimes the competitive pressures have cut costs, increased quality, and enabled innovation. At other times, it’s led to huge profits for contractors and shoddy service for everyone else.

By outsourcing, I mean any kind of arrangement whereby an external party, whether NGO or private sector, is contracted to deliver a pre-designed aid programme. The services to be delivered are defined in advance, and then the donor (or contracting body) invites bids to deliver these services. This is increasingly prevalent in the aid sector. A recent review of DFID’s work revealed that the percentage of aid channelled through for-profit partners in fragile states increased from 3.7% (2009-10) to 19.4% (2012-13). Despite the occasional grumbling from politicians and the British tabloids, I’ve seen remarkably little serious critical scrutiny of this trend.

Like anything else, outsourcing is sometimes good, sometimes bad. Outsourcing cleaning services seems to work pretty well. Outsourcing healthcare, by contrast, raises much more significant concerns. This blog discusses three factors that would justify successful outsourcing, and then explores the extent to which the aid sector meets these criteria.

The first factor is a competitive market. Outsourcing is often justified on the grounds that competition between suppliers drives up quality and cuts costs. If there are not enough suppliers to form a competitive market, then this logic falls through. Outsourcing in an uncompetitive market just leads to a state-sponsored monopoly, with no pressure to cut costs or perform well. Even in a market with multiple possible contractors, it needs to be easy to switch from one supplier to another. If that’s not the case – for example, because the donor is locked into a five or ten year contract – then this reduces the pressure on the supplier to perform.

The second factor is predictable and measurable results. Outsourcing aims to harness the innovation and cost-cutting ability of the private and third sector, by aligning private and organizational incentives (to make money) with public incentives (to deliver some kind of service). In order to align incentives, contracts are drawn up specifying what results the business has to achieve to receive the money. If these results can’t be specified upfront, then it’s unclear how such a contract could be created. How could the donor agree to pay money, if it doesn’t know what it’s paying money for? If results can’t be measured throughout the programme, then the donor will never know whether the contractor has performed well or not.

The final factor is intrinsic motivation. Some theoretical research has suggested that mechanisms that reward high performance with high pay can have a negative effect if they undermine intrinsic motivation. In an international development context, organisations also often need to work together to achieve the results they need. Sharing knowledge and developing partnerships is key to success.

Is the market of aid suppliers competitive? To be honest, I’m not sure. I’ve heard plenty of accusations that aid is delivered by a small cartel of large organisations. Large aid programmes, especially in fragile states, are complex to manage and deliver. ICAI found that “As a result, the security and justice portfolio is increasingly reliant on a small pool of large contractors.” Their review of fragile states highlighted a potential “over-concentration in a few big global players”. On the other hand, there are plenty of aid contractors out there: although each with a different speciality and focus. I’d be interested to hear more evidence on the competitiveness of the aid market.

My problem with outsourcing for aid projects comes from the second and third factors. Results in most aid programmes are unpredictable. Attempts to specify them in advance can damage programmes rather than aid them, setting perverse incentives to meet inappropriate targets. If results can’t be specified in advance, however, it is not possible to hold them accountable for performance. Any kind of result can be seen as a success – because you have no prior target by which achievements can be deemed to be successes or failures. Contracting organisations to deliver unspecified services seems to open the door to poor performance backed up by excuses.

This is compounded by the fact that the results that really matter aren’t easily measurable. Some are, of course; number of mosquito nets distributed can be counted, the number of children in school can be assessed, and they can even be split up by gender. Higher level outcomes, however, are often impossible to measure and attribute to one project. Incidence of malaria depends on the strength of the health system, weather, and public sanitation. Children’s education is dependent on the wealth and interest of the parents, the way in which teachers are trained and treated, and so forth. Private organisations would (quite rightly) feel uncomfortable being held accountable for such goals.

Outsourcing aid delivering starts by trying to align incentives through complex contracts. This is the wrong place to start. Instead, donors should concentrate on finding organisations that share values and interests, whether governments, NGOs, or local community organisations. They should build the capacity of these organisations through long term support, and hold them accountable for long-term success, rather than for hitting targets or running projects.